LEGO Group is the
longtime leader in the construction toy category for Latin America and has
maintained double digit growth in sales for multiple years. (Photo: Alan Chia)

Wednesday, October 21, 2015

Special Reports

Latin America: LEGO, Video Games Grow

Construction toys, led by LEGO, and video and
mobile games help drive growth in Latin America’s toy and game market.

BY ALIXA SHARKEY

While sales of
traditional toys and games in Latin America are strongly correlated with
economic performance and changes in disposable income, sales of video games
seem to play by a different set of rules.

Sales of toys and games grew in 2014 buoyed by significant growth in video game
sales while traditional toys and games sales floundered. In spite of stagnated
economic growth this year, sales of toys and games are projected to grow in
2015 and beyond.

SLOWDOWN HITS TRADITIONAL TOYS

Traditional toys and
games (e.g., action figures, dolls, games, plush toys) are not viewed as basic
necessities and therefore sales of these products in Latin America are strongly
dependent on each country’s economic performance and changes in disposable
income. In 2014 we witnessed varied performance in this industry across the
region. Latin America as a whole experienced real GDP growth of 1.3 percent,
significantly lower than the 2.9 percent growth of 2013. This slowdown in
economic growth and decline in disposable income led to a negative performance
for traditional toys and games in the region, posting a decrease of 1.8 percent
in constant US dollar sales.

Brazil’s stagnant
economy in 2014 was reflected in traditional toys and games sales, with flat
growth in constant terms. The drop in the Brazilian Real against the US dollar
further exasperated the situation, raising prices for toy importers and
domestic toy manufactures who import parts from abroad. With rising prices,
consumers turned to less expensive toy options, with low and mid-priced toys
faring better than more expensive price bands. Brazil’s real GDP is expected to
contract 3 percent in 2015 with energy shortages, waning exports, and cutbacks
in public spending. This will result in further decreases in spending on toys
and games.

Consumer spending in
Argentina has been adversely affected by incredibly high inflation which has
eroded disposable income. Prices of toys and games increased dramatically in
2014 due to the increased price of imports, costs of local manufacturing, and
reduced product availability due in part to import restrictions. For these
reasons toys and games value sales decreased 0.9 percent in 2014 in constant
terms. Sales are expected to decline even further in 2015 as the adverse economic
environment remains unchanged.

Mexico, on the other
hand, showed a positive performance in 2014 due to improving economic
conditions. Consumer confidence returned as the real GDP grew 2.1 percent.
Traditional toys and games sales saw the largest year on year increase in
recent years, with an increase of 3.6 percent in constant terms. Continued
positive economic performance is expected to buoy traditional toys and games in
2015 and through the next few years.

Through 2015 and the
following years growth in toys and games sales will remain muted as economies
continue to struggle and recover. The economic forecast remains dubious for
Argentina, Brazil and several other countries in the region; while Mexico is
showing a positive outlook.

CONSTRUCTION TOYS GROW

The birthrate in Latin
America has been declining steadily with a 7.2 percent decrease in births per
1000 people between 2009 and 2014.Due
to the decline in birth rate, the proportion of the population between the ages
of 0 and 14 years has also been decreasing; while this age group accounted for
28.4 percent of the population in 2009, it only accounted for 26.5 percent in
2014. With fewer children to buy toys for and with increased knowledge about
child development, parents, grandparents etc., are choosing to spend money on
toys and games that will not only serve to entertain but will also educate and
help develop skills.

This trend can be
observed in the increased spending on construction toys and education and
scientific toys, the traditional toys and games categories with the highest
growth in Latin America in 2014. With an increase in constant value sales of
13.6 percent according to Euromonitor International, growth in construction
toys sales was significantly higher than any other traditional toys and games
category in 2014. Despite the difficult economic conditions discussed above,
consumers continue to invest in this category, while growth in other categories
stagnates or declines. It is believed that construction toys will foster
creative play and help develop problem-solving skills and fine motor skills and
therefore consumers are more willing to invest in these toys.

LEGO Group is the
longtime leader in the construction toy category for the region and has
maintained double digit growth in sales for multiple years. 2014 sales were
propelled by the release of The Lego Movie in February of that year. In 2014
LEGO group expanded the production capacity of their factory in Ciénega de
Flores, Nuevo Leon, Mexico, which supplies both Latin America and North
America. Local production in Mexico helps lower costs for local consumers and
increases brand awareness. While Lego is not manufactured locally in Brazil,
margins are kept low to ensure the product is accessible to a larger
demographic. In Brazil, Lego benefits from a wide distribution network and
strong brand awareness that is reinforced through Lego’s global advertising
partnerships with films and the video game industry. In Argentina the
construction toy category is led by Dimare SA, a local producer, with its
brands Blocky, Rasti, and Armatron. Due to this local production, construction
toys is the category least dependent on imports and therefore least affected by
the rising costs of imports in Argentina.

This trend is not
expected to change in the coming years. Euromonitor International expects that
construction and science and education toys will remain the highest growth
categories within traditional toys and games through 2019 with respective
compound annual growth of 8.3 percent and 3.2 percent expected for Latin
America.

NEW CONSOLES SPUR VIDEO SALES

Video game hardware and
software sales seem to play by a different set of rules than traditional toys
and games. While sales of traditional toys and games declined in constant terms
in 2014 due primarily to poor economic performance, video game sales showed
strong growth propelled largely static video game console sales.

As in many other parts
of the world, the gaming population in Latin America has expanded. The demographic
shift can be seen in the increased average age of gamers and the increased
number of female gamers. As the gaming demographic has aged, it has also
developed greater purchasing power.As a
result, gamers are able to seek out the latest technology and games as soon as
they reach the market. The time lag between international launches and
availability in Latin American countries is decreasing, allowing consumers to
purchase products more quickly and further driving demand for the latest
products. The release of the latest generation game consoles at the end of 2013
led to 22.9 percent growth in constant terms for static video game consoles in
Latin American in 2014.

Video game sales in
Brazil were strong in 2014, despite the decline of the Brazilian Real against
the strong US dollar which led to increased unit prices for both video game
hardware and software in 2014. Increases in unit price occurred in Argentina as
well due to high inflation and import restrictions. Video game sales in
Argentina in 2014 were primarily driven by demand for video game hardware.
Import restrictions in Argentina on game software resulted in growth for PC and
console game downloads, though PC and console game downloads remain a small
percentage of total game sales.

Despite difficult
economic conditions in 2015, Euromonitor International forecasts continued
growth for video games in Latin America through 2019. Short term growth will be
driven by innovations in software and new game launches. Growth in console
sales will wane as we move further from the PlayStation 4 and Xbox One launch
dates and these consoles reach market saturation.Forecasted growth for Argentina remains low
as the country enters recession in 2015 and gamers have decreased purchasing
power.

MOBILE GAMING

Though mobile gaming
only accounted for 4.9 percent of video game sales in Latin America in 2014, it
is the fastest growing video game category with significant room to grow as
mobile device penetration continues to expand. Household penetration of
smartphones has risen exponentially in Latin America over the past few years,
Brazil, for example, has seen household penetration of smartphones increase
from 35 percent in 2012 to 130 percent in 2015. While household penetration of
tablets remains lower across the region, it is also experiencing significant
year on year growth.

With increased
smartphone and table penetration, the potential mobile gamer population
continues to expand. The gaming population has expanded to include all ages and
more females. This expansion contributed to the 25.4 percent constant value
growth seen in 2014 and will continue to play a role over the next few years as
the category continues to growth with a 17.7 percent CAGR through 2019.